Corpus Christi: the next oil export hotspot?

The Gulf Coast has long been one of the key avenues for importing oil to the U.S. So we might think the Anne - a 120-yard long oil ship - steaming into the port in Corpus Christi, Texas, in late May was nothing new. After all, crude-carrying ships come there from all over the world, full of oil, to supply U.S. refineries. But the Anne was different…

For one, it was the first time a VLCC - a Very Large Crude Carrier, the second-largest class of oil tanker in the world - had ever berthed there. More importantly, the Anne was empty. The goal wasn’t to import oil, but to export it. And that marks an enormous shift for American shale oil companies. The Anne was in Corpus Christi to see if oil tankers her size could be used to export oil from there. Now, with crude oil market prices once again rising, we may think that exports wouldn’t be that important. But as we enter the latest uptick in an ongoing tug-of war between genuine market forces and artificial manipulations for short-term gains, several factors have now become clear.

When it comes to the trading range for WTI (West Texas Intermediate, the main U.S. benchmark crude oil rate used to set futures contracts in New York), there is a presumption that there is much more excess volume ready to be sold, beyond what demand requires. This continues to weigh on WTI, the U.S. price of oil. Some of this concern is valid, but much is just hype to keep prices down, thereby providing immediate further profits for those who are yo-yoing short positions on oil. Of course, most of those have now been unwound as the price of oil moves back up. When it comes to domestic oil, the primary balance remains the traditional one between supply and demand.

The penchant for shale oil producers to overproduce has been one reason for the decline in crude prices. That has led some industry leaders, such as Continental Resources (CLR) CEO Howard Hamm to caution U.S. producers not to drive themselves into the red. Last week during a CNBC interview, Hamm noted that the current low price for oil is not sustainable. Continued overproduction runs the risk of driving the prices down even further, obliging curtailment of drilling by U.S. operators. The pursuit of near-term revenue is counterproductive, especially for a range of smaller producers facing renewed problems on the debt front and a wellhead price (the price the operator receives when the oil comes out of the ground) that cuts below breakeven. By producing more, they are effectively shooting themselves in the foot.

However, one new wrinkle is emerging that is regarded as a path to both continue producing oil and yet restrain the downward pressure on U.S. oil prices. Exports. American refineries already lead the world in the daily export of oil products (gasoline, diesel, low sulfur content heating fuel, and naphtha). What is new involves the export of straight crude oil. After an over four-decade long prohibition, Congress finally allowed the export of oil last year. And from nothing, America today exports over 1.1 million barrels a day. When combined with the exports of oil products, the U.S. has catapulted into a top global player. All of which sets the stage for a major interest directed to the port of Corpus Christi, TX.

There is a flurry of activity underway there with the terminal capacity and pipeline access to major basins such as the Permian in West Texas and Eagle Ford in South Texas. Corpus Christi has all the earmarks of becoming the next major hotspot for energy investment. It holds a central location among pipeline conduits, export capacity, and petrochemical complexes. Now, this largess of oil coming from the Permian and Eagle Ford can’t easily be used domestically, for a very simple reason. That oil is much lighter and sweeter oil (i.e., it has a lower sulfur content) than what local refineries can effectively process. They were largely built to process heavier sulfur content crude being imported through the Gulf. Now light, sweet crude is very desirable worldwide because it costs less to refine product from it.

That sets the stage for the increasing volume coming into Corpus Christi from the Permian and Eagle Ford being ready made for export at premium prices to markets already prepared to pay more than the price obtainable at home. Other flow coming from further north on pipelines moving through the primary junction at Cushing, OK is more appropriate for the petrochemical complexes around Corpus Christi. Of course, that finished product can then also move into the export stream. Despite problems remaining elsewhere in the U.S. oil picture, the confluence of profit potentials at Corpus Christi looks like a main driver moving forward.

Now, Congress has already given preliminary permission for a $350 million dredging project there but there is some local hope that the Trump Administration’s long-promised infrastructure program will include the Corpus Christi dredging project. Unfortunately, the likelihood that the promised Trump Administration infrastructure investment package 1) sees the light of day, and 2) considers the interests of the Corpus Christi port, remains very much debatable.